Cal Am desal project most expensive option, report says

A final report from a Monterey Peninsula Regional Water Authority consultant that found California American Water's proposed desalination plant would be considerably more expensive than two other proposals has sparked a debate over how the relative costs were calculated and the relevance of the finding.

The final report, issued by Carlsbad-based Separation Processes, Inc. and released by Carmel mayor and water authority vice president Jason Burnett on Tuesday, employed a considerably higher interest rate of about 8.5 percent for financing for Cal Am's proposal than had been used in an earlier draft report. That resulted in a much wider difference in cost between the projects.

As a result, the report found that Cal Am's project would cost about $3,300 per acre-foot per year, while competing proposals from DeepWater Desal and the People's Moss Landing Project would cost about $2,205 and $2,320, respectively.

Burnett said Wednesday the final report underscored the need for local public financing capable of lowering the Cal Am proposal's overall debt cost. Speaking at a state Public Utilities Commission project cost workshop last week, Burnett said public financing could save ratepayers more than $100 million over the life of the project.

Cal Am spokeswoman Catherine Bowie challenged the SPI report's use of a higher interest rate to reach its conclusion, though she said company officials are in talks with the authority on alternative financing plans.

Burnett said the authority is pushing to require Cal Am to include a public contribution in its project financing plan to save ratepayers money, and pointed out that the Monterey Peninsula Water Management District and the county have also recommended a public financing requirement. He proposed requiring Cal Am to accept about $90 million in local funding in place of its own equity, and also to count a low-interest state loan as a public contribution rather than company equity. The local funding would likely have to be raised through a surcharge on water bills or some other fee, Burnett said.

That kind of public financing plan, he argued, would save ratepayers about $112 million over 30 years and make Cal Am's project more competitive with the others, improving its chances of ultimately earning the authority's recommendation.

WaterPlus President Ron Weitzman questioned whether ratepayers would be willing to pay a surcharge or make some other upfront contribution to the project cost for a desal plant Cal Am would own, pointing out that the ratepayers would be assuming all the risk in case the project failed.

Cal Am is already in the process of collecting about $32 million from Peninsula ratepayers on the failed regional desal project.

The authority's technical advisory committee is set to meet Jan. 7 and is expected to consider the final SPI report.

Meanwhile, the authority board is expected to make a formal recommendation on which of the three projects it will support in time to submit it as part of official testimony before the CPUC on Feb. 22. An updated report from SPI, expected next month, will help inform that decision, according to Burnett.

Bowie suggested it was misleading for the SPI report to apply the higher interest rate to the company's proposal and pointed out that Cal Am's plan calls for employing both a no-interest $99 million surcharge and low-interest state revolving fund loans, which would lower the overall cost of the project debt to about 4 percent. By that measure, she said, Cal Am's project would end up costing ratepayers about the same as the other two proposals.

Burnett said the surcharge was left out of SPI's analysis of the Cal Am proposal's cost because it isn't guaranteed and wasn't included in either of the other two proposals, and including it would have offered Cal Am an unfair advantage by setting up an "apples-to-oranges" comparison.

He pointed out that SPI was not asked to do a detailed financial analysis, and there was room for more discussion about the findings. He said the authority would rely on the water management district's expertise, or hire a financial consultant, to take a more in-depth look at financing.

Bowie said that Cal Am officials continue to discuss alternative project financing proposals with the authority, and said they share the authority's goals of lowering costs to customers and are committed to an "open dialogue" on the issue.